Archive for the ‘Wal-Mart’ Category

Friday Roundup

Friday, August 21st, 2015

Roundup2Wal-Mart related, quotable, spot-on, scrutiny alerts and updates and prosecutorial common law defeat. It’s all here in the Friday roundup.

Wal-Mart Related

In its recent 2Q FY2016 earnings call Wal-Mart stated:

“FCPA and compliance-related costs were approximately $30 million, comprised of approximately $23 million for the ongoing inquiries and investigations, and approximately $7 million for our global compliance program and organizational enhancements. Last year, FCPA and compliance-related costs were $43 million in the second quarter. We expect FCPA-related expenses to continue to trend down, so we now expect our full year FCPA-related expenses to range between $130 million and $150 million. This compares to our guidance in February of $160 to $180 million.”

Doing the math, Wal-Mart’s 2Q FCPA and compliance-related costs is approximately $470,000 per working day.

Over the past approximate four years, I have tracked Wal-Mart’s quarterly disclosed pre-enforcement action professional fees and expenses. While some pundits have ridiculed me for doing so, such figures are notable because, as has been noted in prior posts and in my article “Foreign Corrupt Practices Act Ripples,” settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from corporate FCPA scrutiny.  Pre-enforcement action professional fees and expenses are typically the largest (in many cases to a degree of 3, 5, 10 or higher than settlement amounts) financial hit to a company under FCPA scrutiny.

While $470,000 per working day remains eye-popping, Wal-Mart’s recent figure suggests that the company’s pre-enforcement action professional fees and expenses have crested as the figures for the past seven quarters have been approximately $516,000, $563,000, $640,000, $662,000, $855,000, $1.1 million and $1.3 million per working day.

In the aggregate, Wal-Mart’s disclosed pre-enforcement professional fees and expenses are as follows.

FY 2013 = $157 million.

FY 2014 = $282 million.

FY 2015  = $173 million.

FY 2016 = $63 million (projections for the remainder of the FY of approximately $67 – $87 million)

Quotable

Regarding the recent BNY Mellon enforcement action, Jay Darden (Paul Hastings and recently the Assistant Chief of the DOJ’s Fraud Section) stated: “it’s not the U.S. government’s job to regulate hiring policy.” (See here).

*****

In this Corporate Crime Reporter, Lamia Matta (Miller & Chevalier) states:

“Companies are less aggressive in [voluntarily] reporting. Companies are finding that they don’t save a whole lot by going in and self-reporting as soon as they find a problem. They are still subject to extensive investigation. The cost is the same if they self-report and then cooperate as it would be if they just cooperate. The agencies say that is not the case. But if you look at the trends, that does seem to be the case.”

“The other thing is that the decision to self-report is taking a lot longer than it once used to. Companies might think — it may make sense to self-report, but we are going to wait it out a bit before we do so. The process is now much more considered than it once used to be.”

“And companies are not as inclined to buy into the agencies’ aggressive theories of jurisdiction as they might have once been. For all of these reasons, you are seeing companies being less quick to self report. I don’t know if the self-reporting numbers are down or not. They are difficult to track.”

Spot-On

This Bryan Cave alert regarding the recent order in the DOJ’s enforcement action against Lawrence Hoskins (see here for the prior post) is spot-on.

It states:

“This holding directly contradicts the “guidance” provided by the U.S. in its Resource Guide, published jointly by the Department of Justice and the Securities and Exchange Commission. That guidance states unequivocally:

‘Individuals and companies, including foreign nationals and companies, may also be liable for conspiring to violate     the FCPA—i.e., for agreeing to commit an FCPA violation—even if they are not, or could not be, independently charged with a substantive FCPA violation.

* * *

A foreign company or individual may be held liable for aiding and abetting an FCPA violation or for conspiring to violate the FCPA, even if the foreign company or individual did not take any act in furtherance of the corrupt payment while in the territory of the United States.’

This Order reminds companies and individuals that some of the legal principles surrounding the FCPA recently have been developed out of settlements with the government instead of through the courts. On issues as important as these, it can be worthwhile to test some of the government’s theories in the only place they can be adjudicated.”

To learn about other selective information, half-truths, and information that is demonstratively false in the FCPA Guidance see “Grading the Foreign Corrupt Practices Act Guidance.”

Scrutiny Alerts and Updates

Ford Motor Co.

Reuters reports:

“The [SEC] is helping German prosecutors to investigate the alleged payment of bribes by Ford to speed the passage of containers through Russian customs, a source at the U.S. carmaker said on Tuesday. Ford and Schenker, the freight business of state-owned German rail company Deutsche Bahn, have been under investigation in Germany since 2013 over suspected bribery and other offences related to the busy Russian port of St. Petersburg. The port is Russia’s European gateway with more than 2,000 companies using it for shipments, according to its website, but it is also known among customers for notoriously long delays. The [SEC] has now joined investigations by prosecutors in Cologne, where Ford’s European headquarters are based, a source at the carmaker told Reuters, confirming a report in Tuesday’s Sueddeutsche Zeitung newspaper. Two Ford employees, eight current and former workers at Schenker and one staffer from a Russian contractor are under investigation, a spokesman at the Cologne prosecutor’s office said.”

Petrobras

In regards to this recent media report, the company stated in this filing:

“Petrobras hereby declares that, in relation to news published in the media concerning the payment of a fine to the U.S. authorities, there are no ongoing negotiations regarding the eventual payment of a fine for the winding up of civil and criminal investigations in the United States regarding the violation of the anti-corruption legislation. Nor has there been any decision by the U.S. authorities regarding the merit of such an investigation or the eventual amounts involved.”

SciClone Pharmaceuticals

One of the longest instances of FCPA scrutiny concerns SciClone Pharmaceuticals.  As highlighted in this prior post, in August 2010 the company disclosed:

“On August 5, 2010 SciClone was contacted by the SEC and advised that the SEC has initiated a formal, non-public investigation of SciClone. In connection with this investigation, the SEC issued a subpoena to SciClone requesting a variety of documents and other information. The subpoena requests documents relating to a range of matters including interactions with regulators and government-owned entities in China, activities relating to sales in China and documents relating to certain company financial and other disclosures. On August 6, 2010, the Company received a letter from the DOJ indicating that the DOJ was investigating Foreign Corrupt Practices Act issues in the pharmaceutical industry generally, and had received information about the Company’s practices suggesting possible violations.”

Recently the company disclosed:

“In July 2015, SciClone reached an agreement in principle with the staff of the US Securities and Exchange Commission (SEC) for a proposed settlement for a range of matters, including without admitting or denying possible violations of the Foreign Corrupt Practices Act (FCPA). The agreement, which includes disgorgement, prejudgment interest, and penalties totaling $12.8 million, is contingent upon the execution of formal settlement documents and approval of the settlement by the SEC’s governing Commission. The Company has not yet reached a resolution of these matters with the Department of Justice (DOJ) and management continues to work diligently to obtain closure on this matter.”

Akamai Technologies 

The company updated its previous FCPA-related disclosure as follows:

“We are conducting an internal investigation, with the assistance of outside counsel, relating to sales practices in a country outside the U.S. that represented less than 1% of our revenue during the three and six months ended June 30, 2015, and in each of the years ended December 31, 2014, 2013 and 2012. The internal investigation includes a review of compliance with the requirements of the U.S. Foreign Corrupt Practices Act and other applicable laws and regulations by employees in that market.  In February 2015, we voluntarily contacted the U.S. Securities and Exchange Commission and Department of Justice to advise both agencies of this internal investigation. We are cooperating with those agencies. As of the filing of this quarterly report on Form 10-Q, we cannot predict the outcome of this matter. No provision with respect to this matter has been made in our consolidated financial statements.”

General Cable 

The company recently disclosed the following regarding its previously disclosed FCPA scrutiny.

“We have been reviewing, with the assistance of external counsel, certain commission payments involving sales to customers of our subsidiary in Angola. The review has focused upon payment practices with respect to employees of public utility companies, use of agents in connection with such payment practices, and the manner in which the payments were reflected in our books and records. We have determined at this time that certain employees in our Portugal and Angola subsidiaries directly and indirectly made or directed payments at various times from 2002 through 2013 to officials of Angola government-owned public utilities that raise concerns under the FCPA and possibly under the laws of other jurisdictions. Based on an analysis completed with the assistance of our external counsel and forensic accountants, we have concluded at this time, that we are able to reasonably estimate the profit derived from sales made to the Angolan government-owned public utilities in connection with the payments described above which we believe is likely to ultimately be disgorged. As a result, we recorded an estimated charge in the amount of $24 million as an accrual as of December 31, 2014. There was no change to the accrual in the second quarter of 2015. The accrued amount reflects the probable and estimable amount of the Angola-related profits that the Company believes is subject to being disgorged, and does not include any provision for any fines, civil or criminal penalties, or other relief, any or all of which could be substantial.
We also have been reviewing, with the assistance of external counsel, our use and payment of agents in connection with our Thailand and India operations and certain transactions in our Egypt and China businesses, which may have implications under the FCPA. We have voluntarily disclosed these matters to the SEC and the DOJ and have provided them with additional information at their request, including information in response to an SEC subpoena. The SEC and DOJ inquiries into these matters are ongoing. We continue to cooperate with the DOJ and the SEC with respect to these matters. At this time, we are unable to predict the nature of any action that may be taken by the DOJ or SEC or any remedies these agencies may pursue as a result of such actions. We are continuing to implement a third party screening process on sales agents that we use outside of the United States, including, among other things, a review of the agreements under which they were retained and a risk-based assessment of such agents to determine the scope of due diligence measures to be performed by a third-party investigative firm. We also have provided anti-corruption training to our global sales force, and ultimately will provide such training to all salaried employees. In addition, we have hired a Chief Compliance Officer, who is responsible for the day-to-day management of our compliance function. The Chief Compliance Officer reports to our Chief Executive Officer, and also has a reporting relationship with the Audit Committee.”
Another Prosecutorial Common Law Defeat

Related to the above, one of the best guest posts in FCPA Professor history was this 2011 post from Michael Levy in which he described the concept of prosecutorial common law.  Prosecutorial common law is all around us.  Take a look at the footnotes of the FCPA Guidance - most of the “authority” cited for “legal” propositions is DOJ or SEC settlements.

For obvious reasons, prosecutorial common law does not sit well with federal court judges.  For instance, in U.S. v. Bodmer, Judge Shira Scheindlin of the Southern District of New York, in rejecting the DOJ’s position that the FCPA’s criminal penalty provisions applied to a foreign national prior to the 1998 FCPA amendments, noted as follows – “the Government’s charging decision, standing alone, does not establish the applicability of the statute.”  Likewise as noted in this previous post about the Giffen enforcement action, Judge William Pauley of the Southern District of New York stated that prosecutorial common law ”is not the kind or quality of precedent this Court need consider.”

Prosecutorial common law recently suffered another defeat when the Southern District of New York ruled that the Food & Drug Administration can’t bar a drug company from marketing a pill for off-label use as long as the claims are truthful.  (See here for the Wall Street Journal article).

The decision follows a 2012 decision in U.S. v. Caronia (see here for the prior post) in which the Second Circuit concluded that the DOJ’s theory of prosecution concerning so-called off-label promotion of drugs was invalid. Prior to Caronia and even after Caronia, the DOJ has used the theory of prosecution to secure billions in settlement against risk-averse pharmaceutical companies.

****
A good weekend to all.

 

 

Friday Roundup

Friday, May 22nd, 2015

Roundup2Wal-Mart related, request for a new trial, scrutiny alert, and for the reading stack.  It’s all here in the Friday roundup.

Wal-Mart Related

Here is what Wal-Mart said in its recent 1Q FY2016 earnings call:

“FCPA and compliance related costs were approximately $33 million, comprised of $25 million for the ongoing inquiries and investigations, and $8 million for our global compliance program and organizational enhancements.”

Doing the math, Wal-Mart’s 1Q FCPA and compliance-related costs is approximately $516,000 in FCPA-related expenses per working day.

Over the past approximate three years, I have tracked Wal-Mart’s quarterly disclosed pre-enforcement action professional fees and expenses. While some pundits have ridiculed me for doing so, such figures are notable because, as has been noted in prior posts and in my article “Foreign Corrupt Practices Act Ripples,” settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from corporate FCPA scrutiny.  Pre-enforcement action professional fees and expenses are typically the largest (in many cases to a degree of 3, 5, 10 or higher than settlement amounts) financial hit to a company under FCPA scrutiny.

While $516,000 per working day remains eye-popping, Wal-Mart’s recent figure suggests that the company’s pre-enforcement action professional fees and expenses have crested as the figures for the past six quarters have been approximately $563,000, $640,000, $662,000, $855,000, $1.1 million and $1.3 million per working day.

In the aggregate, Wal-Mart’s disclosed pre-enforcement professional fees and expenses are as follows.

FY 2013 = $157 million.

FY 2014 = $282 million.

FY 2015  = $173 million.

FY 2016 = $33 million (overall projection of $160 – $180 million for entire year)

Request for New Trial

Carlos Rodriguez, an individual convicted in a Haiti Teleco-related enforcement action (the focus of the 11th Circuit’s “foreign official” decision) and currently serving a federal prison sentence, has requested a new trial in this recent pro se motion.  In pertinent part, the motion states:

“In the instant case, an essential element of the FCPA charges hinged on whether Defendant had knowledge of the scheme to defraud Teleco . The factual predicate the Government relied upon at trial for proving that defendant had knowledge of the scheme to defraud Teleco was Perez ‘s [a cooperating witness] testimony .

Defendant has obtained new evidence , a sworn and notarized affiidavit from James Dickey , Terra ‘s General Counsel. Mr. Dickey ‘s affidavit states that ”he was never at any meeting at Terra or elsewhere where the subject of bribes to Antoine as International Director of Halti Teleco were discussed . Had the word ”bribe” been used in my presence in connection with the resumption of service with Haiti Teleco or the reduction of payments to that company, at any time during my tenure as general counsel, I would have remembered it and I would have immediately shut it down.

The affidavit demonstrates that ”facts” or ”evidence” the Government relied upon to show that Defendant had the requisite knowledge did not exist, and that the basis for his testimony against Defendant would have been completely impeached if this had been available at trial. In as much as the affidavit addresses an essential element of the FCPA offense, there is a reasonable likelihood that this new evidence would have affected the judgment of the jury, and, therefore, at a minimum, a new trial is required pursuant to Rule 33.”

Scrutiny Alert

Affinia Group (a North Carolina based company involved in design, manufacture, distribution and marketing of industrial grade products and services, including extensive offerings of aftermarket parts for automotive and heavy-duty vehicles) recently disclosed:

“As previously disclosed, the Company has conducted a review of certain allegations arising in connection with business operations involving its subsidiaries in Poland and Ukraine. The allegations raise issues involving potential improper payments in connection with governmental approvals, permits, or other regulatory areas and possible conflicts of interest. The Company’s review, which the Company considers to be substantially complete, has been supervised by the Audit Committee of Affinia’s Board of Directors and has been conducted with the assistance of outside professionals. Affinia voluntarily self-reported on these matters to the U.S. Department of Justice and the U.S. Securities and Exchange Commission and has cooperated fully with the U.S. government. No determination may yet be made as to whether, in connection with the circumstances surrounding the review, Affinia may become subject to any fines, penalties and/or other charges imposed by any governmental authority, or any other damages or costs that may arise in connection with those circumstances.”

For the Reading Stack

An informative read here by Eric Carlson (Covington & Burling)  regarding the Chinese fapiao, a form of receipt that is often used in connection with various fraudulent practices.

*****

A good holiday weekend to all.

Wal-Mart’s Recent Disclosures

Monday, April 27th, 2015

Wal-MartLast week, Wal-Mart made several disclosures that touched upon its Foreign Corrupt Practices Act scrutiny and compliance enhancements.

This post highlights FCPA and related information in Wal-Mart’s Global Compliance Program Report  on FY 2015; its proxy statement; and its annual report.

Walmart’s Global Compliance Program Report on FY 2015

The report covers a number of topics including FCPA and related anti-corruption matters.

In its recent annual report, Wal-Mart disclosed spending approximately $220 million over the past three years in global compliance program and organizational enhancements.

This significant investment in FCPA compliance should be relevant as a matter of law in the future if a non-executive employee or agent acts contrary to Wal-Mart’s policies and procedures and in violation of the FCPA.  (See my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense“).

Compliance defense detractors say that such a defense will promote “check-a-box compliance” and a “race to the bottom.”

There is nothing “check-a-box” about spending approximately $220 million over the past threeyears on FCPA compliance enhancements nor can one credibly argue that if other companies follow Wal-Mart’s enhancements and approach that this is a “race to the bottom.”

The key policy issue is this.

Wal-Mart has engaged in FCPA compliance enhancements in reaction to its high-profile FCPA scrutiny.

Perhaps if there was a compliance defense more companies would be incentivized to engage in compliance enhancements pro-actively.

A compliance defense is thus not a “race to the bottom” it is a “race to the top”  (see here for the prior post) and it is surprising how compliance defense detractors are unable or incapable of grasping this point.

In the recent Global Compliance Program Report, under the heading “People,” the report states in pertinent part:

“Anti-corruption is a particular area of emphasis for our compliance program. During FY15, we continued to develop our internal anti-corruption resources. For example, we supplemented our anti-corruption leadership team by recruiting anti-corruption directors in the eCommerce businesses at Walmart.com.br (Brazil) and Yihaodian.com (China). Working with Walmart’s global anti-corruption team, these new directors conduct due diligence, develop and provide anti-corruption training, and oversee the implementation of anti-corruption policies and procedures.

Also in FY14, Walmart began to appoint teams of compliance monitors in each of our international retail markets. These monitors (known as Continuous Improvement Teams) regularly visit our stores, assess the effectiveness of our compliance controls at store level, train our managers and associates on proper compliance procedures, and assist the operators in correcting any issues identified. During FY15, the Continuous Improvement Team completed over 5,500 assessments at our retail locations, identified any deviations from our policies and processes, and collaborated with our store operators to correct over 90% of those issues by year end.

In FY15 we expanded this concept by beginning to carry out a multi-year plan to establish teams of compliance monitors focused on anti-corruption policies and our related financial controls. As with the existing Continuous Improvement Teams, these monitors are designed to constantly assess and improve our performance. We began the process of appointing these internal anti-corruption monitors in FY14 and the monitors conducted their first assessments in FY15.

In light of the progress in building our internal anti-corruption capabilities, in FY15 we transitioned to our internal staff a number of activities that external consultants had been handling. This increases the capabilities of our internal anti-corruption team, which is critical to the effectiveness and long-term sustainability of our anti-corruption program.”

Under the heading “Policies and Processes,” the report states in pertinent part:

“[I]n FY14 the company designed an enhanced global anti-corruption training and communication program to further define target audiences for anti-corruption messaging and to more effectively teach anti-corruption principles. This program came to life over the past year in several ways, including:

Developing simplified anti-corruption messaging for use in our stores in five key markets;

Providing anti-corruption training to our associates around the world in seven languages;

Delivering communications from business leaders in each international market regarding integrity and anti-corruption;

Enhancing the ways in which we track our anti-corruption training efforts; and

Expanding our anti-corruption training beyond our associates to include key third parties who do business with Walmart. In FY15, we provided anti-corruption training to third-party partners in 10 international markets.”

Under the heading “Systems and Analytics,” the report states in pertinent part:

“With many retail locations and associates throughout the world, we have a wealth of data available to help us anticipate and identify compliance risks. Efficiently collecting and utilizing those data can be a challenge. In FY14, the company launched an ambitious effort to develop and deploy a number of global systems to assist with this task. In FY15, the company spent more than $40 million USD carrying out this effort and made significant progress in installing and utilizing these technologies. This included technology to:

Conduct due diligence research on third parties that may interact with governmental entities on our behalf. The technology, for instance, collects information from the third parties about their businesses and key personnel; it then searches various databases to identify adverse news stories, litigation, government sanctions, and politically exposed persons relating to the third parties and their key personnel.

Centralize the oversight of our license and permit applications and renewals. In FY15, we extended a global license-management system into 11 of our international retail markets. The expanded management system organizes the licensing and permitting requirements in each market, simplifies the process for applying for licenses, and provides a single repository for documentation associated with our licensing obligations. Our associates now have critical licensing information at their fingertips, along with analytics to predict and prepare for our licensing needs.”

*****

In its recent proxy statement, Wal-Mart disclosed as follows.

“The Audit Committee held 15 meetings in fiscal 2015, seven of which related primarily to its ongoing FCPA-related investigation and compliance matters.”

[...]

“[E]ach member of the Audit Committee received an additional fee during fiscal 2015. Since 2011, the Audit Committee has been conducting an internal investigation into, among other things, alleged violations of the [FCPA] and other alleged crimes or misconduct in connection with certain foreign subsidiaries, and whether prior allegations of such violations and/or misconduct were appropriately handled by Walmart. The Audit Committee and Walmart have engaged outside counsel from a number of law firms and other advisors who are assisting in the ongoing investigation of these matters. This investigation continues to result in a significant increase in the workload of the Audit Committee members, and during fiscal 2015, the Audit Committee conducted seven additional meetings primarily related to the investigation. Audit Committee members also received frequent updates regarding the investigation via conference calls and other means of communication with outside counsel and other advisors. In light of this continuing significant additional time commitment, in November 2014, the [ Compensation, Nominating and Governance Committee] and Board approved an additional fee of $37,500 payable to each Audit Committee member other than the Audit Committee Chair, and an additional fee of $50,000 payable to the Audit Committee Chair. These additional fees may be received in the form of cash, Shares (with the number of Shares determined based on the closing price of Shares on the NYSE on the payment date), deferred in stock units, or deferred into an interest-credited cash account.”

*****

In its recent annual report, Wal-Mart disclosed as follows.

“The Audit Committee (the “Audit Committee”) of the Board of Directors of the Company, which is composed solely of independent directors, is conducting an internal investigation into, among other things, alleged violations of the U.S. Foreign Corrupt Practices Act (“FCPA”) and other alleged crimes or misconduct in connection with foreign subsidiaries, including Wal-Mart de México, S.A.B. de C.V. (“Walmex”), and whether prior allegations of such violations and/or misconduct were appropriately handled by the Company. The Audit Committee and the Company have engaged outside counsel from a number of law firms and other advisors who are assisting in the on-going investigation of these matters.

The Company is also conducting a voluntary global review of its policies, practices and internal controls for FCPA compliance. The Company is engaged in strengthening its global anti-corruption compliance program through appropriate remedial anti-corruption measures. In November 2011, the Company voluntarily disclosed that investigative activity to the U.S. Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”). Since the implementation of the global review and the enhanced anti-corruption compliance program, the Audit Committee and the Company have identified or been made aware of additional allegations regarding potential violations of the FCPA. When such allegations are reported or identified, the Audit Committee and the Company, together with their third party advisors, conduct inquiries and when warranted based on those inquiries, open investigations. Inquiries or investigations regarding allegations of potential FCPA violations have been commenced in a number of foreign markets where the Company operates, including, but not limited to, Brazil, China and India.

The Company has been informed by the DOJ and the SEC that it is also the subject of their respective investigations into possible violations of the FCPA. The Company is cooperating with the investigations by the DOJ and the SEC. A number of federal and local government agencies in Mexico have also initiated investigations of these matters. Walmex is cooperating with the Mexican governmental agencies conducting these investigations. Furthermore, lawsuits relating to the matters under investigation have been filed by several of the Company’s shareholders against it, certain of its current directors, certain of its former directors, certain of its current and former officers and certain of Walmex’s current and former officers.

The Company could be exposed to a variety of negative consequences as a result of the matters noted above. There could be one or more enforcement actions in respect of the matters that are the subject of some or all of the on-going government investigations, and such actions, if brought, may result in judgments, settlements, fines, penalties, injunctions, cease and desist orders, debarment or other relief, criminal convictions and/or penalties. The shareholder lawsuits may result in judgments against the Company and its current and former directors and officers named in those proceedings. The Company cannot predict at this time the outcome or impact of the government investigations, the shareholder lawsuits, or its own internal investigations and review. In addition, the Company has incurred and expects to continue to incur costs in responding to requests for information or subpoenas seeking documents, testimony and other information in connection with the government investigations, in defending the shareholder lawsuits, and in conducting the review and investigations. These costs will be expensed as incurred. For the fiscal years ended January 31, 2015, 2014 and 2013, the Company incurred the following third-party expenses in connection with the FCPA investigation and related matters:

WalMart Expenses

 

 

 

 

These matters may require the involvement of certain members of the Company’s senior management that could impinge on the time they have available to devote to other matters relating to the business. The Company expects that there will be on-going media and governmental interest, including additional news articles from media publications on these matters, which could impact the perception among certain audiences of the Company’s role as a corporate citizen.

The Company’s process of assessing and responding to the governmental investigations and the shareholder lawsuits continues. While the Company believes that it is probable that it will incur a loss from these matters, given the on-going nature and complexity of the review, inquiries and investigations, the Company cannot reasonably estimate any loss or range of loss that may arise from these matters. Although the Company does not presently believe that these matters will have a material adverse effect on its business, given the inherent uncertainties in such situations, the Company can provide no assurance that these matters will not be material to its business in the future.”

Wal-Mart Three Years Later

Tuesday, April 21st, 2015

Wal-MartThree years ago this week, the New York Times ran a major story (here) titled “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle.”

The conduct at issue in the Times article related to Wal-Mart’s largest foreign subsidiary, Wal-Mart de Mexico (“Wal-Mart Mexico), and suggested that Wal-Mart Mexico “orchestrated a campaign of bribery to win market dominance” and that the entity “paid bribes to obtain permits in virtually every corner” of Mexico. The April 2012 NY Times article resulted in intense world-wide media scrutiny of Wal-Mart.

However, it was known months before the NY Times article that Wal-Mart was under FCPA scrutiny.  (See here for the December 2011 post highlighting Wal-Mart’s FCPA disclosure). Thus, this week is a false three year anniversary of Wal-Mart’s FCPA scrutiny, but a meaningful anniversary nevertheless.

Three years ago this week, in response to the NY Times article, Wal-Mart’s stock dropped approximately 8%. For instance, the last trading day before the NY Times April article, Wal-Mart stock closed at $62.45.  A few days later, Wal-Mart stock closed at $57.36.

However, savvy investors should have recognized the NY Times induced dip as a buying opportunity because the market often overreacts (perhaps because of the plethora of suspect FCPA enforcement information in the public domain). Indeed, on the one year anniversary of the article, Wal-Mart stock closed at $78.29, on the two year anniversary of the article Wal-Mart stock closed at $77.66, and yesterday Wal-Mart stock closed at $78.14.

A December 2012 front-page NY Times article (see here for the prior post) added additional details to the previous April 2012 article, but did not change much from an FCPA perspective.

In the three years since the original NY Times article, Wal-Mart’s FCPA scrutiny has followed a fairly typical pattern.  Wal-Mart’s internal review has expanded beyond Mexico, civil shareholder suits and derivative claims have been filed, Wal-Mart has engaged in various remedial measures, and the company’s pre-enforcement action professional fees and expenses have skyrocketed.

As highlighted in this recent post, in the aggregate Wal-Mart has disclosed pre-enforcement professional fees and expenses as follows.

FY 2013 = $157 million.

FY 2014 = $282 million.

FY 2015  = $173 million.

FY 2016 = $160 – $180 million (projected)

The above expenditures include compliance enhancements Wal-Mart has made (see here for the prior post).

As highlighted here, some are aghast at the mere mention of Wal-Mart’s high pre-enforcement action professional fees and expenses.  The response of some has been that Wal-Mart is a big company and “will survive its FCPA spending spree” plus it is “playing catch up for a decade of what appears to be FCPA neglect.”

Such statement wholly ignores other aspects of the New York Times reporting.

Indeed, the conduct described in the NY Times articles was unremarkable from a Foreign Corrupt Practices Act perspective – a view I have consistently held since April 2012 (see here for a prior post and here for my article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure.”).

The unremarkable portion of the NY Times articles is that a foreign subsidiary of a major multi-national company operating in an FCPA high-risk jurisdiction allegedly made payments to “foreign officials” to facilitate or grease the issuance of certain licenses or permits.  Even according to the NY Times, Wal-Mart’s subsidiary in Mexico “had taken steps to conceal [the payments] from Wal-Mart’s headquarters in Bentonville, Ark.” and Wal-Mart Mexico’s chief auditor altered reports sent to Bentonville discussing various problematic payments.

A November 2012 NY Times article (here) by David Barstow (the same author as the April 2012 and December 2012 articles) rightly noted that Wal-Mart’s investigation “was uncovering the kinds of problems and oversights that plague many global corporations.”  It was perhaps the most insightful thing the NY Times has said about Wal-Mart’s FCPA scrutiny, yet the November 2012 article received scant attention compared to the other two articles.

It is also interesting to ponder the salient question of whether the payments at issue in Wal-Mart, which are outside the context of procurement, actually violate the FCPA (and here, as in many cases, there is an important distinction between the law Congress passed and DOJ/SEC enforcement theories).  For instance, as noted in this prior post and in my above article, the government has an overall losing record in non-procurement type cases when actually put to its burden of proof.  However, as we all know, this will matter very little when it comes to any resolution of Wal-Mart’s scrutiny.

For all of the above reasons, I do not believe that Wal-Mart’s scrutiny “will test FCPA enforcement in new ways” as some have suggested.

Nor should it.

FCPA enforcement ought not be influenced merely by the fact that a talented journalist at a leading newspaper has devoted time and effort to cover an instance of FCPA scrutiny.  If Barstow and the NY Times would have focused on BizJet, the reaction likely would have been, and with good reason, more negative.  But then again, there probably would not have been any reaction at all because BizJet is obviously no Wal-Mart.  Insert [here] many other recent FCPA enforcement actions.  If Barstow and the NY Times would have focused on [that] instance of FCPA scrutiny, the story would have largely read the same.

Nor do I believe that Wal-Mart’s FCPA scrutiny will likely end up in the Top 5 FCPA enforcement actions of all time in terms of settlement amount.

The reason?

All of the cases in the Top 5 are procurement cases, not cases focused on licenses, permits and the like.

If Wal-Mart does indeed crack the Top 5 (and with the seeming “just because” escalation of FCPA fine and penalty amounts – see here - it is likely only a matter of time before a license, permit case does crack the Top 5), it will likely be for reasons unrelated to substantive FCPA issues, but rather an increase in the company’s so-called culpability score under the advisory Sentencing Guidelines based on its alleged handling of the potential FCPA issues in 2005.

But even here, the seldom-discussed November 2012 NY Times article, added additional relevant details.  It suggests that Wal-Mart’s December 2011 FCPA disclosure was motivated by Wal-Mart’s desire to pro-actively understand its FCPA risk (notwithstanding whatever may have occurred within the company in 2005 upon learning of potentially problematic payments in Mexico).  According to the article, Wal-Mart’s internal review began in Spring 2011 when Jeffrey Gearhart (Wal-Mart’s general counsel) learned of an FCPA enforcement action against Tyson Foods (like Wal-Mart, a company headquartered in Arkansas – see here for the prior post discussing the Tyson enforcement action).  According to the NY Times article, “the audit began in Mexico, China and Brazil, the countries Wal-Mart executives considered the most likely source of problems” and Wal-Mart hired KPMG and Greenberg Traurig to conduct the audit.

Throughout Wal-Mart three-plus years of FCPA scrutiny certain commentators have predicted that the Wal-Mart derivative actions would set a new standard for director liability.  They were once again proven wrong.  As highlighted here, the document request dispute in connection with a Wal-Mart derivative action in Delaware was much to do about nothing.  More importantly, as highlighted here, last month a federal court judge dismissed eight Wal-Mart shareholder FCPA-related derivative claims that were consolidated into one action.

FCPA scrutiny tends to last, on average, 2-4 years from the point of disclosure to any eventual enforcement action.  Wal-Mart’s FCPA scrutiny is thus now in the middle of this range.  However, it is not uncommon for FCPA scrutiny to last 5-8 years, thus it may be several more years before Wal-Mart’s FCPA scrutiny and its eventually outcome are know.

Court Dismisses Wal-Mart Shareholder FCPA-Related Derivative Claims

Thursday, April 2nd, 2015

DismissedIn the aftermath of Wal-Mart’s Foreign Corrupt Practices Act scrutiny, certain company shareholders (as is fairly typical in instances of FCPA scrutiny) filed derivative actions against various current or former Wal-Mart officers and directors alleging, among other things, breach of fiduciary duties.

By way of background as to derivative claims, the internal affairs of a corporation, such as the rights of corporate directors, are governed by state law.  State law, including most prominently Delaware law, provides directors broad discretion to manage the corporation subject to their fiduciary duties to the corporation and its shareholders.  A director’s fiduciary duties include the duty of care and the duty of loyalty, including its subsidiary component the duty of good faith.

A corporate director’s duty of good faith has evolved over time to include an obligation to attempt in good faith to assure that an adequate corporate information and reporting system exists.  In the notable Caremark decision by the influential Delaware Court of Chancery, the court held that a director’s failure to do so, in certain circumstances, may give rise to individual director liability for breach of fiduciary duty.

In Stone v. Ritter, the Delaware Supreme Court provided the following necessary conditions for director oversight liability under the so-called Caremark standard: (i) a director utterly failed to implement any reporting or information system or controls; or (ii) having implemented such systems or controls, a director failed to monitor or oversee the corporation’s operations. The court held that both situations require a showing that a director knew that they were not discharging their fiduciary obligations and courts have widely recognize that a director’s good faith exercise of oversight responsibility may not necessarily prevent employees from violating criminal laws or from causing the corporation to incur significant financial liability or both.

Derivative claims, such as those filed against Wal-Mart’s current and former officers and directors, are subject to unique pleading requirements.  Ordinarily, a company’s board of directors has the exclusive authority to institute corporate action such as filing a lawsuit on behalf of the corporation when it has been harmed.  However, when the harm to the corporation is the result of an alleged breach of fiduciary duty by the directors, the law recognizes that the board of directors is unlikely to sue itself in such a situation.  Thus, the law provides a mechanism for shareholders to bring a lawsuit, not in their individual capacity, but on behalf of the corporation to recover monetary damages for the corporation.

Because a derivative action usurps a traditional board of director function and can be subject to harassment and abuse, state law often requires shareholders to first make a demand on the corporation to file suit or to plead with particularity so-called demand futility, meaning that demand on the board would be futile because the board is incapable of making an independent judgment concerning the conduct at issue.

Most derivative actions, including those in the FCPA context, are brought as demand futility cases because if a shareholder makes a demand on the board of directors to bring the claim it will be assumed that the shareholder views the board of directors as sufficiently independent to analyze the claim and the board’s decision will be analyzed under the board-friendly business judgment rule.  To survive a motion to dismiss, a shareholder pleading demand futility must allege more than conclusory allegations regarding a breach of fiduciary duty.  Rather, the shareholder must allege with particularly facts suggesting that the majority of directors were interested; or that the directors failed to inform themselves; or that the directors failed to exercise due care as to the conduct at issue.

Those who predicted that the Wal-Mart derivative actions would set a new standard for director liability were once again proven wrong (see here for the prior post).

Earlier this week, in this order U.S. District Judge Susan Hickey (W.D. Ark.) dismissed eight Wal-Mart shareholder FCPA-related derivative claims that were consolidated into one action.

Judge Hickey summarized the shareholders allegations as follows.

“Plaintiffs allege that the Individual Defendants breached their fiduciary duties of loyalty and good faith by: (1) permitting violations of foreign and federal laws and Wal-Mart’s code of ethics; (2) permitting the obstruction of an adequate investigation of known potential (and/or actual) violations of foreign and federal laws; and (3) covering up (or attempting to cover up) known potential (and/or actual) violations of foreign and federal laws. Plaintiffs also allege that Individual Defendants violated Sections 14(a) and 29(b) of the Exchange Act by causing Wal-Mart to make false or misleading statements in its April 2010 and April 2011 proxy materials relating to annual director elections.”

After reviewing applicable Delaware law, Judge Hickey stated, in pertinent part, as follows.

“The Complaint consistently implies that Defendants should have or must have known about the alleged misconduct by virtue of their positions and the supposed reporting structure at Wal-Mart. According to Plaintiffs, “senior executives … knew about” the alleged misconduct, those “executives [were] required to regularly report to the Audit Committee of Wal-Mart’s Board,” and the Audit Committee, in turn, “was obligated to report on [this] to Wal-Mart’s full Board.” Plaintiffs allege that, given the “inference” that information concerning bribery was reported to Wal-Mart’s Board, Wal-Mart made a conscious decision not to act on this information.

Plaintiffs reference vague “decisions” made by Defendants but do not plead with particularity who made these decisions, how these decisions were made, or when the decisions were made. Plaintiffs generally allege that the Board made a decision not to act in response to evidence of criminal conduct. Missing from the Complaint are any particularized facts that link a majority of the Director Defendants to any actual decision. Plaintiffs point to no alleged meeting, discussion, or vote where the Board allegedly made one of these decisions. This lack of such particularized facts regarding a conscious decision about how or whether to respond to the alleged misconduct indicates that an analysis under Aronson is inappropriate.”

Elsewhere, Judge Hickey stated:

“According to Plaintiffs, nine Director Defendants knew about the wrongful conduct in 2005-2006 (the alleged bribery in Mexico and the internal investigation that allegedly concealed the wrongdoing) and either actively participated in it or acquiesced in it. Defendants argue that Plaintiffs have failed to sufficiently plead that a majority of the Board knew about or consciously ignored the alleged wrongful conduct in 2005-2006 and therefore cannot show that a majority of the Director Defendants face a substantial likelihood of personal liability. The Court agrees.

Nothing in the Complaint suggests any particularized basis to infer that a majority of the Board had actual or constructive knowledge of the alleged misconduct, let alone that they acted improperly with scienter. Plaintiffs’ allegations do not provide the particulars for what each Director Defendant knew, how he or she learned of the information, or when he or she learned of the information. Thus, as discussed below, Plaintiffs have failed to plead with particularity that at least eight Director Defendants face a substantial likelihood of personal liability so that their ability to consider a demand impartially would be compromised.”

[...]

“Courts may not impute knowledge of wrongdoing to directors simply because they serve on the board or because the corporate governance structure requires that notice of the wrongdoing reach the board.”

*****

In a footnote, Judge Hickey’s order states: “The Foreign Corrupt Practices Act prohibits United States companies from bribing foreign officials to secure improper business advantage.”

This is an inaccurate statement of law.

Rather, the FCPA contains an “obtain or retain business” element that must be proved.  Indeed, the DOJ’s position that the FCPA captures payments to “secure an improper business advantage” wholly apart from the “obtain or retain business” element has been specifically rejected by courts. (See here for the prior post).

The inaccurate statement of law in the order is perhaps not surprising given that the Judge referred to the FCPA as the “Federal Corrupt Practices Act.”

*****

For additional coverage of Judge Hickey’s decision – as well as its potential impact on current Delaware court proceedings arising from the same alleged facts – see here form the D&O Blog.